What is the Market Price for Cell Site Rent?
Md7 Helps Landlords Assess the Value of Their Cell Site and Cell Tower Leases
Published in AGL Magazine by Tom Leddo, Md7’s Vice President of Operations
What Is It Worth?
Everyone wants to get paid what they’re worth.
Whether it’s based on principle or pride, it absolutely galls us when someone else gets a better deal, or we lose out to someone who undercuts our asking price. While we steadfastly hold something’s worth as an absolute, we have often come to this determination by a subjective, mind’s eye calculation of what is commonly referred to as “the going rate.”
For cell site landlords, the determination of worth goes something like this: “My buddy is making $1,650 a month on his cell site lease and my site is in a much better location than his so I should be getting $1,800.”
Landlords are often irked and even angered when they are told that’s not the rate that the tenant wants to pay. They think they’re getting gypped. They don’t understand why this tenant is not honoring the going rate. And therein lies the problem: never confuse the “going rate” with the “market rate.” The last house to sell on my street in San Diego almost a year ago has nothing to do with what a different buyer will pay for my house today.
The real market rate for cell site leases is not what another tenant paid down the street. In today’s business environment, it’s what the competing potential landlord across the street will accept. Thanks to carriers’ escalating operating costs, the public’s voracious appetite for new technology and the network’s evolving engineering requirements; cell site leasing has become a competitive marketplace. Let’s take a look at what landlords can do to protect their income.
Average Rent Is Not Market Rent
For years it has been said that the going rate for a cell site lease is roughly $1,500 to $1,800 for space on a tower or rooftop and $500 to 600 for ground space to build a tower. Obviously, this varies widely depending on a downtown Manhattan location vs. rural farm land. But this dollar amount represents the “average rent” that tenants have been willing to pay over the last several years in a market where speed and coverage were a carrier priority, the high costs of which were off-set by an ever-increasing number of subscribers. With subscribers now reaching market saturation in tandem with escalating operating costs to meet technology demands, carriers are reevaluating their expenses and what they’re willing to pay for their cell site leases. Add to that new technology and network evolutions that have redefined “the best site in town,” and you’ve got a new model that will change the business of cell site leasing. This dynamic is slowly but surely redefining what is market rate rent.
Let’s refresh on how “market price” is determined. Market price is the price of a product or service as determined dynamically by buyers and sellers in an open market. Thinking back to Econ 101, it is simply where the demand curve intersects the supply curve. As the desire for goods increases while the supply of goods holds constant or decreases then the price for those goods rises (Exhibit 1). Conversely, if the desire for goods holds constant or decreases while the availability of goods increases, then the price falls (Exhibit 2).
In cell site lingo, if a potential tenant really desires a cell site and there is only one potential location for that lease, then the rent will increase. And if that tenant’s desire holds constant or decreases while the potential options for cell site locations increase, then rent will decrease.
The anatomy of the cell site network is rapidly changing to accommodate a progression in services that started with voice communication and now include email, photos, music, video and more. This network evolution has redefined what “the best site in town” looks like, which dramatically affects the supply-and-demand formula of lease rates.
The Best Site in Town
While one might think the Empire State Building may offer great coverage of Manhattan, it is actually not a useful cell site because a single site that high will not be able to handle the millions of calls made each day in New York. Obviously the best way to cover Manhattan is through several sites, much closer to the ground and spread throughout the city. Additionally, more cell phone users and more varied applications now require a greater bandwidth, which further increases the need for sites closer to the ground. Instead of one mountaintop site covering lots of users, carriers piece together lower elevation sites to accommodate greater bandwidth requirements necessary to meet technology demands. In other words, the average Rad Center is decreasing. As sites come closer to the ground and closer to each other, carriers are less particular about their location. This flexibility combined with an increasing ability to use non-typical cell sites (such as light poles) creates a competitive environment that drives cell site rents down.
Variables of Site Selection
In negotiating leases on behalf of tenants, the most common response we at Md7 hear is, “Another carrier just paid $X down the street so I want at least $X”. But the variables of site selection are unique to each site and situation.
Historically, tenants have focused on quick deals for “must have” locations as determined by radio frequency needs, rather than good deals. This has resulted in short cutting the negotiation process which determines the market equilibrium. The saying “you want it bad, you get it bad” characterizes the situation carriers have created for themselves – over-inflated rents. Carriers are now beginning to mange their real estate assets with the same savvy indicative of corporations focused on maximizing their investments and minimizing their operating costs.
As a landlord, what can you control when it comes to your cell site? Site selection is based on a number of factors that tenants consider when determining sites to include in their network:
- Constructability – Is the land or rooftop viable for developing and maintaining a cell site?
- Zoning/Permitting — Will the tenant be able to obtain the necessary zoning approval and permits for site development?
- Access – Is the location reasonably accessible for the development and ongoing maintenance?
- RF Coverage — Will the site provide the desired coverage?
- Rent — How much will the landlord charge?
Of all these variables, the only one you can control is rent. And to win, you may need to reconsider your perception of the “going rate” — especially when there are other sites in the search ring that are competing for the carrier’s business. Not to mention the fact that carriers are coming to terms with the fact that they have to live with this site for a long time and they’re willing to negotiate it correctly upfront. Remember that in a dynamic market, the market price is what BOTH parties will accept. What’s the guy across the street willing to do? Will you let him steal your deal? Will you put yourself at a competitive disadvantage by clinging to an outdated understanding of the going rate?
As one tower landlord told us when he saw a surveying crew staking out a site on his neighbor’s property, “I would have to look at that tower every day on my neighbor’s property, so I might as well do what it takes to get it on mine and get paid for it.” With over 200,000 cell sites and counting across the country, it may take a lot of deals to lower the average rent. But it is changing — one deal at a time.
© Copyright 2009 Md7, LLC
Lease Optimization Isn’t Just a Rent Reduction
Md7 Offers Conventional Wisdom on Necessary Cell Tower and Cell Site Lease Language
Published in AGL Magazine by Tom Leddo, Md7’s Vice President of Operations
What would you say if the landlord of your apartment building decided to charge you more rent because you upgraded your couch to a sectional with a built in recliner? Or, if your office lease payment went up when you added 10 new employees? Or, if the mortgage on your ranch doubled when you added 20 head of cattle?
The answer to these questions is pretty obvious — you’d say no way am I going to pay more just because I enhanced how I use the same amount of space. While this seems like a no-brainer, you’d be surprised how leases between cell site tenants and landlords often lack this kind of conventional wisdom that we logically apply to our business practices.
In the ongoing conversation about cell site lease optimization,it should be understood that “optimization” is about much more than a rent reduction. Take a look at the other enhancements cellular tenants are seeking to incorporate into their cell site leases.
Then and Now
A mid-year 2008 survey by CTIA (International Association for Wireless Communications) reminds us that less than 25 years ago there were 599 cell sites — a handful compared to today’s census of 220,472. With an average 4.8-percent increase year over year, it’s easy to see that early industry initiatives were focused on launching the network. But now wireless carriers have officially acknowledged the magnitude of their real estate portfolios and are taking steps to control skyrocketing expenses and manage vast site portfolios as networks continue to evolve.
In the 1980s, first-generation (1G) mobile technology was based on circuit-switched analog systems designed to singly accommodate voice communication. The second generation (2G) was a total replacement of the first generation of networks and handsets. The recent upgrade to 3G and 3.5G digital technology is yet a new iteration that has extracted a tremendous investment from global carriers. According to Wikinvest, in the United States alone, three of the largest carriers have spent a combined $10 billion on developing their 3G networks. And even with the wonders of iPhone technology still burning bright in the eye of the consumer, carriers are already pursuing the dream of 4G and evaluating how it will help them handle the increasing amount of data traffic that results from e-mail, music play, photo storage, Web surfing, and video streaming.
In fact, the international telecommunications regulatory and standardization bodies are working for the official deployment of 4G networks as early as 2012, but critical definitions or base requirements have yet to be released. That basically amounts to a moving target for carriers when it comes to network planning and cell site functionality.
And yet, in this swiftly moving techno-evolution, existing cell site lease language is still couched in a 1G world. Most landlords think a call from a tenant representative such as Md7 is just about rent reductions – but it is much more. While the tenant is certainly interested in paying fair market rates on its rents, equally, if not more important, is their interest in the terms of the lease. It’s the terms that protect the carrier’s ability to keep its cell site network in sync with a rapidly changing marketplace and protect its billion-dollar investment in techno brawn and bandwidth.
Necessary Lease Language
Let’s take a look at some of the main common-sense lease enhancements necessary to ensure a cell site’s long-term flexibility.
Expansion of Use & Premises
Expansion of Use gives the tenant the right to add, exchange or modify new equipment and/or add new technology or frequency within the same square footage they are currently renting. Let’s face it — cell sites were originally designed for 1G voice communication. Often the original lease language simply referred to the operating of a communications facility. As part of the negotiating process, some landlords interpret this general language to mean voice only and demand more money when tenants ask to modify a cell site to accommodate new technology. But as noted above, that’s like the rent on your apartment going up because you decide to upgrade your sofa. One exception to this might be an increase in the number of antennas, which should at least be pre-negotiated to accommodate the tenant’s future needs.
Expansion of Premises gives the tenant the option to add additional square footage at a pre-negotiated rate to accommodate future equipment needs. It’s fair that more space should mean more rent, but without a pre-negotiated rate, the cell site can be held hostage when carrier modifications are necessary to meet both regulatory and consumer demands. Most landlords can agree that a pre-negotiated rate is fair, especially when the need to maintain the long-term viability of the network is involved.
With each advance from one generation of technology to another, the tenant’s existing, licensed bandwidth is becoming depleted and they must purchase additional spectrum at FCC auctions in order to accommodate the many services mentioned above. Again, some landlords argue a 1G interpretation of a lease that was written for voice services versus voice plus WiMax or other similar technology. But that’s like increasing the rent on a real estate broker’s office when that broker expands to also offer mortgage services.
Carriers want to be able to maintain their network in non-peak hours to avoid down time. If a site needs repair at midnight, they don’t want to wait until 9 a.m. to service it, which would hinder phone service during morning rush hour. Further, it becomes a safety issue if there’s a 3 a.m. emergency and the victim is unable to call 911 because the network is down. According to CTIA, there are hundreds of thousands of 911 calls made daily using cell phones, so there a societal responsibility to maintain the network, of which landlords play a crucial role. Usually cell site equipment is in a place that won’t interfere with business operation. Of course, the lease language should be tailored to protect the integrity of particular activities, such as refraining from repairs at a site on a church during the pastor’s Sunday morning sermon.
Assignments & Subletting
As lease negotiators, we spend a lot of time on this issue. Some tenants want the right to assign or sublet the space they rent without restrictions or landlord approval. However, it is reasonable for the landlord to be able to control or at least approve what subtenants and/or assignees come on to their property. In certain cases it is also reasonable for a landlord to expect revenue sharing in the event that a tenant uses its expansion rights in conjunction with its subleasing rights to share the property with a third party, especially if the tenant is taking down additional square footage. Thus, regarding an assignment, it is reasonable for a tenant’s rights to be restricted to a company controlling, controlled by or under common control with the tenant, or one that buys majority control of the tenant company, which is a common occurrence. Regarding sublease rights, landlords often stand firm on this issue and make it subject to landlord consent and include a negotiated revenue share.
Fixed Escalators and Automatic Renewals
Because carriers have tens of thousands of sites to manage, efficiency and accuracy are paramount. Fixed escalators and automatic renewals are key administrative strategies that are employed across their entire lease portfolio. A single annual or term-based rent increase for the life of the lease is more efficient than CPI escalators that have to be calculated annually on a case-by-case basis. While landlords speak to the “fairness” of a CPI, it is very difficult to maintain across a portfolio of sites. Also, tenants have too many leases to know with confidence that renewal notices or consent letters have been properly processed at the end of each term in the life of a lease. When leases renew automatically every five years, the risk of losing a lease because of a data entry error in their lease management software is reduced and there can be surety that the network stays intact.
Speaking of new standards and regulations, the current debate over the need for cell site back-up power could also impact current leases. So important has the network become to the fabric of our society that the FCC is in the process of evaluating what carriers may be further mandated to do keep the network stable. Generators, batteries or other hazardous materials may become staples of cell site equipment. Tens of thousands of leases are silent on this issue and could eventually need amending. Something like this further underscores that the network is bigger than any one site and tenants are compelled to structure their leases according to the big picture.
© Copyright 2009 Md7, LLC
Why are Cell Site Leases Changing?
MD7’s Top 10 Most Frequently Answered Questions
Published in AGL Magazine by Tom Leddo, Md7’s Vice President of Operations
Most people don’t like change. It often makes them wary or uneasy as they contemplate what comes next. For the most part, wariness of change is merely a fear of the unknown – like being in the dark. In Md7’s conversations with tens of thousands of landlords about the changes being made to their cell site leases, we have often explained that in the telecommunications industry where continually advancing technology is central to its operations, change is not only a reality, it’s a necessity. Over the years, my colleague, Danny Ulibarri, and I have identified landlords’ top 10 most frequently asked questions about why their lease is changing. Take a look and see if any of these questions have been on your mind — and if Md7’s insights as wireless tenant representatives help illuminate the issues.
1. Why would the carrier want to mess with the tallest site in town?
As telecommunications technology evolves, so does the definition of “the best site in town.” As I mentioned in a previous AGL article, contrary to popular belief, the Empire State Building does not offer the best coverage in Manhattan. One high site can’t handle the millions of calls made each day in New York, nor can it accommodate the bandwidth needed to run voice communication, video, email, music, photo storage and more. In other words, taller is no longer better. Today’s network relies on a greater number of low elevation sites to accommodate the growing number of users and the bigger bandwidth requirements necessary to meet technology demands.
2. Why should I compromise my rent when I have the best site in town?
Landlords often think that their site is more valuable because it is in a high-traffic area. Or it’s the tallest. Or it’s centrally located. As noted above, advances in technology are redefining what makes a good site. But further, as cell sites come closer to the ground and closer to each other, carriers are less particular about their location. This flexibility combined with an increasing ability to use non-typical cell sites (such as light poles) creates a competitive environment that drives cell site rents down. The landlord who once had “the best site in town” must now acknowledge that carriers have many viable options to choose from.
3. I’m happy with the way my lease is. Why does it have to change?
The industry itself is changing the way it does business, in particular in its efforts to control operating expenses. There is a “perfect storm” of market dynamics compelling tenants to take immediate action: 1) subscriber saturation, 2) decreased revenue per subscriber, and 3) increased cost per user thanks to escalating operating costs and ongoing investment in network infrastructure to accommodate increasingly high-tech services. Escalating expenses have become a number-one priority for all carriers. Cell site rents are one of the largest expenses so it’s no surprise that carriers have focused on potential savings initiatives in this area. What’s more, their scrutiny has revealed certain inequities in what they pay for space versus what more traditional tenants pay. For example, what a carrier pays for a 250-square-foot rooftop space usually exceeds what an interior tenant is paying for a more premium space that includes building amenities and services. Regarding tower leases, the inequity arises when the carrier rents space on a quarter acre of land and pays a monthly fee that is equal to what it would cost to purchase an entire acre outright. A good deal is only good when it works for both parties. In this case, tenants are looking to attain a better level of cost efficiency and equity in their cell site leases.
4. Why won’t you pay me as much as the other carriers on my tower?
It is actually this mindset that helped create the problem carriers are facing. Compelled to expand their networks, tenants once paid higher rents in a market where speed to market and coverage were a priority. While tenants traditionally competed with each other for the best sites, the market dynamic is beginning to shift and now landlords are competing with each other to keep their tenants. What today’s tenants are competing for is operating efficiency. Escalating costs and decreasing revenues have resulted in well-publicized mergers and acquisitions, so carriers are more motivated than ever to right-size rents. Tenants are reviewing their networks and reevaluating how well the lease agreements meet their economic and technological initiatives. As tenant representatives, our company alone has personally contacted upwards of 20,000 landlords on behalf of the carriers, which is only about 10 percent of the market. It’s just a matter of time before you get a call from every carrier wanting to reassess their lease.
5. Why aren’t I making what the guy down the street is?
This is a conversation about average rent versus market rent, which I addressed in great detail in the January AGL. For years it has been said that the going rate for a cell site lease is roughly $1,500 to $1,800 for space on a tower or rooftop and $500 to 600 for ground space to build a tower, give or take whether it’s a rural or urban location. But this dollar amount represents the “average rent” that tenants were willing to pay in yesterday’s market, where speed and coverage were paramount. Today, carriers are pursing real market rates for cell site leases, which is not what another tenant paid down the street— it’s what the competing potential landlord across the street will accept. Cell site leasing has become a competitive marketplace, and you have to decide if holding fast to your price is worth the possibility of losing your rent entirely to the guy next door.
6. Why should I deal with this when my local carrier representative said not to worry?
Carriers are big companies with regional and national expectations and initiatives. The national executive charged with maintaining operating efficiency isn’t necessarily in communication with your regional representative. Local reps keep the wheels turning while critical assessments made at the corporate level dictate new direction. It’s through this high-level direction that companies like ours are often tasked to contact landlords on behalf of carriers to discuss potential changes to the network in a particular region. If you receive a call from a tenant representative, be sure they are authorized by the carrier to discuss your lease. Md7 readily puts doubtful landlords in touch with our corporate contact to confirm the validity of the carrier’s intentions.
7. Why would the carrier want to change the lease when they just renewed it?
While headquarters is strategizing its forward-planning objectives and considering the fate of tens of thousands of sites, local managers are conducting business as usual in their corners of the world. The fact is, because of the carrier’s large cell site portfolio, a monthly report is automatically generated to prompt lease renewals, independent of what changes may be brewing at the corporate office. A directive from corporate overrides any auto renewals initiated by the regional office.
8. Why would the carrier be renegotiating my lease — it’s fairly new?
Given the increased competition and today’s economic environment, tenants are changing leadership, strategies, and operating plans. Every decision (even if just recently made) is being reevaluated. Additionally, mergers and consolidation create redundancy and realignment. New technology has necessitated different requirements of cell sites that may mean more, less or changing locations. In short, the industry is in constant flux and carriers must be responsive to it — even if it means re-doing. It can be a very fickle business. When it comes to cell sites, these days there’s no Mr. Right. Just Mr. Right Now.
9. Why do we need to change my agreement when the carrier was just here performing maintenance on the site?
Carriers have made a multi-billion dollar investment in their respective networks. In fact, according to the CTIA (International Association for the Wireless Telecommunications Industry), wireless companies have invested almost $190 billion in capital since the introduction of the national regulatory framework, not including tens of billions paid to the U.S. Treasury for spectrum —the bandwidth necessary to accommodate the advanced technology of services the market demands. It takes constant vigilance to keep up with consumer demand for more and more services. For example, about 56% of mobile devices are already capable of browsing the web. Several carriers are now spending billions to build the new 3G and 4G networks that accommodate these services. The point is that whatever tomorrow’s plan may be for the network, it has to work today. Carriers are going to protect their investment in each cell site until the minute it is terminated. As mentioned above, the regional office is charged with keeping their corner of the network up to speed until corporate determines which sites provide the most viable, long-term, lower-cost alternatives.
10. I have a 30-year lease!
Actually, a typical lease is written for a five-year term with up to five renewals, totaling 30 years. Tenants may opt not to renew at each term. But more importantly, many landlords don’t realize that the typical lease includes clauses that enable the tenant to exercise their option to terminate with as little as 90, 60 or even 30 days notice. While the typical tenant prefers to remain for a full thirty years or more, the lease may not be flexible enough to meet the ever-evolving cell site requirements. An equally important aspect of the carrier’s initiative to update leases is to upgrade the lease language to provide operational flexibility for the long-term.
© Copyright 2009 Md7, LLC
The Role of Tenant Representatives in the Wireless Industry
Md7 Helps Carriers Navigate the Perfect Storm of Increasing Costs, Decreasing Revenues, and Market Saturation
Published in AGL Magazine by Tom Leddo, Md7’s Vice President of Operations
If you were paying double, triple or even quadruple the rent than the guy next to you was, what would you do about it? That’s what carriers recently started asking themselves when they re-evaluated the cost of leasing ground space for towers and rooftop space in a drastically changing and increasingly competitive marketplace — the wireless industry. Any business person worth their salt wouldn’t be caught dead paying anything other than fair-market value on their leases, right? But how does a company with a complicated national real estate portfolio begin to manage the process of right-pricing their rents?
That’s where tenant representatives come in. Often referred to as lease optimizers, these industry specialists are sometimes accused of using scare tactics to bully landlords into giving up their rents for bogus reasons. But like any industry, the ethics of the players vary from company to company. At Md7, we pride ourselves on our ability to be smart real estate asset managers who present landlords with the logical reasoning behind why the carrier is seeking to renegotiate the lease.
Let’s take a look at the changes happening in the wireless industry that have compelled carriers to retain tenant representatives.
With a 2007 census of more than 213,000 cell sites nationwide (versus less than 23,000 in 1995), wireless carriers have officially acknowledged the magnitude of their real estate portfolios. In fact, cell site leases represent the largest expense for wireless carriers internationally second only to payroll. Managing these costs has become a priority as carriers navigate their forward planning and the new technology that continues to profoundly impact the growth of their cell site networks and services.
First, let’s talk about why rents are carriers’ second biggest expense.
The industry is experiencing the perfect storm when it comes to expense control. More than four out of five consumers own a cell phone. Historically, carriers realized profits by adding subscribers, but with market saturation fast approaching, attention has turned to converting subscribers by offering “all you can eat” plans and popular service bundles. This, in turn, has lead to a significant decrease in the average revenue per user as carriers offer competitive pricing to lure subscribers. This is evidenced by media reports that the average local monthly wireless bill has fallen approximately 30% in inflation-adjusted dollars. The trifecta of this storm is that the carriers’ cost per user is going up thanks to escalating rents and the ongoing network investment necessary to sustain increasingly hi-tech services.
Given this market dynamic, carriers are under intense pressure to control expenses, and what’s their current priority? Cell site and tower leases. A by-product of the wireless industry’s growth strategy since its inception, expanding the network was initially more important than evaluating rents. Now, carriers are taking steps to manage their commercial real estate interests with the same savvy indicative of corporations focused on maximizing their investments.
Role of Tenant Reps
But commercial real estate is a complex business and for decades professional landlords have hired brokers to monitor the competition’s lease terms and conditions. Large office complexes employ full-time professional property and asset managers to represent their interests.
Less than 10 percent of brokers focus exclusively on representing tenants, a more recent industry segmentation that equalizes access to critical market information. Most Fortune 1000 corporations currently utilize tenant rep services so they can be informed about competitive lease terms and conditions. Now this commercial real estate management strategy is overtaking the wireless industry and a new niche has developed for the administration and evaluation of cell site and tower leases. With their sprawling nationwide networks that function in dozens of markets simultaneously, carriers require yet another level of specialized tenant representation, which is what Md7 does.
Md7’s job is two-fold. First, we conduct a market analysis of competitive lease rates and alternate site locations in the area and propose terms that accurately reflect the fair market value of the space the carrier leases. For example, what a carrier pays per square foot for a 250-square-foot rooftop space usually exceeds by two to four times what an interior tenant is paying for a more premium space that includes building amenities and services. Regarding ground space for tower leases, the inequity arises when the carrier rents space on a quarter acre of land and pays a monthly fee that is equal to what it would cost to purchase the land outright.
Second, Md7 inventories the terms of the lease to ensure that it does not inhibit the carrier’s ability to keep the site in sync with rapidly changing technology. Cell site leases were originally designed to accommodate equipment that provides cellular phone service. But the industry’s swiftly moving techno-evolution is making futuristic novelties like mobile Facebook not only a reality, but a consumer demand. About 56% of mobile devices are already capable of browsing the web. Several carriers are now spending billions to build the new 3G and 4G networks that accommodate these services. To do this, they need fair access to their sites to continually upgrade the equipment.
According to the CTIA (International Association for the Wireless Telecommunications Industry), wireless companies have invested almost $190 billion in capital since the introduction of the national regulatory framework, not including tens of billions paid to the U.S. Treasury for spectrum —the bandwidth necessary to accommodate the advanced technology of services the market demands.
The bottom-line reality of today’s market is that it’s costing carriers more to run a business that is yielding less profits. As a business person, what would you do to get control? Clearly, landlords want to be treated fairly and want to make money. So do carriers. But the fact is, carriers’ priorities are changing and they are managing their escalating rents much more closely. As the carrier’s tenant representatives, Md7’s end-goal is for landlords to retain the carrier’s business so that both parties realize the full value of the cell site.
© Copyright 2009 Md7, LLC